It is all obvious or trivial except…

Bradford and Bingley

The total loan book for B&B is £40 billion or so. So that is the total exposure. Add the Northern Rock exposure and that\’s how you get to £150 billion.

But for it to cost that much you have to value those mortgages at nothing. That every one of them will fail, that none will be paid and that the costs of repossession and resale will be equal to the value of the debt. That is, that all of those houses are worth damn near nothing.

We might indeed be having problems but they\’re not that bad as yet.

It\’s easy enough to believe that we taxpayers will take a haircut of 10%, 20 % even, just as it\’s possible that it could be a wash, but it really ain\’t gonna be a 100% loss.

Or if you prefer, if events do lead to a 100% loss then we\’ve all got much greater problems than that loan book.

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13 comments on “Bradford and Bingley”

I’ve made a similar point before but it doesn’t stop lefties chucking those numbers about. Ironic when the similarly sized numbers for the amount of money their precious State wastes (ID cards, anyone?) doesn’t seem to trouble them.

Still, with HMG running off the B&B loans at least they’ve got an incentive to keep inflation under control.

What I want to know is why the government has taken on these liabilities? Is the £40 billion a simple loan book or does it contain complex and toxic stuff? The fact no private bank would touch it I assume it is the latter.

Oh there are lots of lefties at the Telegraph. Yvette Cooper was writing some revisionary nonsense just the other day. And besides, the left has no monopoly on ignorance – plenty of uninformed authoritarianism from staffers (eg the odious Heffer).

Kit, the government has taken on these loan book assets (not liabilities) because B&B was funding itself (ie raising liabilities to match the assets) in the money market, and the credit crunch means it can now no longer do this (no-one will lend any money any more) and it needs to repay its previous short-term money market loans as they expire, without calling in the assets (ie the mortgages). So it’s just a liquidity problem: the assets are probably mostly fine and will probably mostly be repaid in full, but over a long time frame. B&B has just run out of time, so to avoid a messy insolvency, the government has taken its assets and will make good its liabilities, and then over time, if all goes according to plan, realise the assets and cover some or even all of the money spent to settle its liabilities.

Because we don’t want all the people to whom B&B owes money, which it should eventually be able to pay back from its mortgages, to be forced to write off their debts as B&B’s mortgage assets go to a fire-sale.

The risk to taxpayers is very small; the damage that would be done if we didn’t do the bail-out is very large. Therefore, it makes sense to do the bail-out.